A Forward Exchange is a common type of like-kind exchange under U.S. Internal Revenue Code Section 1031. It allows the deferral of capital gains taxes when an investment property is sold and a similar property is purchased within a specific time frame.
In a Forward Exchange, the process typically unfolds as follows:
- The property owner sells their existing property (referred to as the “relinquished” property).
- The proceeds from that sale are placed with a qualified intermediary, a neutral third party who holds the funds to avoid “constructive receipt” by the property owner (which would invalidate the 1031 exchange).
- The property owner identifies a replacement property within 45 days of the sale of the relinquished property. The IRS requires that the replacement property is of “like-kind” or similar in nature, character, or class.
- The replacement property must be purchased, and the exchange completed, within 180 days of the sale of the relinquished property.
The primary benefit of a Forward Exchange is that it allows investors to defer capital gains taxes, which would otherwise be incurred upon the sale of the property. However, it’s important to note that these transactions must follow the strict guidelines set forth by the IRS in order to qualify as a 1031 exchange.